Circle of Greed

by Patrick Dillon

  The pace became so feverish that Lerach rewrote the office lease so that the temperature never rose above sixty-five degrees Fahrenheit—to keep everyone alert. In the huge corner office with its view to eternity were a marble-topped bar and group photos of Lerach, his wife, two daughters Gretchen and Shannon from separate marriages, and various colleagues on exotic outings—playing steel drums on a Caribbean beach, fly-fishing in Alaska, hoisting umbrella-covered drinks under Hawaiian palms—along with those sketches, painted by Kathy’s son, depicting Lerach as Saint George. Lerach’s cases were literally stacked, as bulging legal folders vied for space on table tops, his desk, and his floor.

  Each bore the name of a company that he was suing or preparing to sue. Behind his desk, on side-by-side credenzas, clear acrylic squares, six inches tall and two inches thick, were arranged in rows bearing his legal trophies as if preserved in amber. Each held a diminutive reproduction of a verdict, judgment, or settlement, the name of the company, date of the award, and the amount—beginning with the first, the $50 million U.S. Financial award in 1978, followed by the painstakingly won 1980 United Methodist Church settlement of $21 million, an amount that was growing to more than $40 million because the terms of the settlement called for future profits to go to the residents and their heirs. Lerach hadn’t kept any fee for this follow-up service, although he was entitled to it. He could afford to be magnanimous. The work had been so good, he had earned $2.3 million the previous year, just $300,000 less than his mentor Mel Weiss. In the San Diego office the number of plastic trophies was multiplying by four or five each year, attesting to the firm’s success and the upward arc of class action lawsuits throughout America. Forbes magazine would soon estimate that plaintiffs’ lawyers would earn in excess of $10 billion in complex litigation in a single twelve-month period; Milberg Weiss, mainly due to Lerach’s activities, captured nearly 60 percent of the yield.

  One Lerach trophy, a relatively small payout for $6.75 million in 1985, was particularly noteworthy. The company, Priam Corp., a Silicon Valley manufacturer of computer disk drives, was one of about two hundred similar firms to suffer downturns in an industry shakeout in the mid-1980s. Lerach sued, arguing that the company had not adequately warned investors about the riskiness of its venture into the sector. He had taken measure of the company’s vulnerability and guessed correctly that it lacked the resolve and resources to defend itself in court. Relying on public records and statements, he produced what would become his trademark, a chart tracing the company’s stock price over time, with colored boxes drawing attention to key junctures, especially when a company’s stock dropped toward the executives’ stock options “exercise” price or when company officials unloaded stock before a sharp decline. In a perfect Lerach world, this event would be preceded by positive remarks from company officials, driving the price up, followed by a sell-off before another decline. Priam adhered to this very pattern, and he let its lawyers know in gory detail what a protracted trial would look like. Financial ruin. Humiliation. Disgrace. The board of directors decided to capitulate, settling for about 20 percent of what Lerach claimed as their total exposure.

  Fighting a lawsuit with Lerach to its conclusion is “so non-productive,” observed Paul M. Wythes, a Silicon Valley venture capitalist and a Priam director. “These companies are trying to compete in a world market.” He was pointing out what so many other U.S. executives were learning. Insurance industry studies found that in 1987 the costs of tort litigation were running at about 2.6 percent of the United States’ total gross national product, compared with less than 0.4 percent in Japan and West Germany. Three years later Priam declared bankruptcy.

  That wasn’t Lerach’s concern—in his mind, they all deserved their fates. Meanwhile his legal tactics had become clear. Young tech companies in volatile markets were easy prey. During the next two decades they would provide the bulk of hundreds of lawsuits and recoveries, most settled out of court. Already at the close of 1988 the Lucite trophies were challenging the amount of available space. For one particular prize, however, there would always be room, and Lerach would point it out to visitors with irreverent glee. It commemorated a multimillion-dollar settlement in 1984 that got Silicon Valley’s goat to start bleating. It began on December 7, 1984, Pearl Harbor Day, when Lerach’s legal team served a securities fraud complaint against Seagate Technology and its flamboyant CEO Alan F. Shugart, an entrepreneurial engineer who helped invent the floppy disk and was considered in Silicon Valley not just a pioneer but an example of all that the New Economy made possible, technologically and personally.

  Born with a clubfoot in 1930 in Los Angeles and raised by a single mother, Shugart majored in engineering physics at the University of Red-lands and took a job at IBM in 1951. He rose through the ranks, becoming director of engineering in 1969. Later that year he left the staid “Big Blue” for Memorex (which would be sued by David B. Gold in a landmark case four years later). By then Shugart and some Memorex confederates had launched Shugart Associates, a company that was supposed to build a complete business operating system to compete with IBM, but it ran out of money in two years. Shugart’s venture capitalists eased him out of the company that bore his name. Shugart licked his wounds by opening a bar in Santa Cruz, where he liked to surf. He bought a salmon fishing boat and became its captain. But as he later told Business Week, “I had a tough time meeting my Porsche payments.” In 1979 a former Memorex colleague, Finis Conner, had an epiphany: the new personal computer market badly needed a cheap hard drive. This had always been Shugart’s engineering forte, and Conner called him. Together they restarted Shugart Technologies, naming it Seagate.

  Seagate’s first product was a breakthrough, a 5¼-inch disk drive with five megabytes of memory that retailed for $1,500. Both the PC industry and Al Shugart were on their way. The colorful Shugart once described the key to success this way: “Find a parade and get in front of it.” It was a description containing hints of both self-deprecation and truth. It could also have been used to describe the working philosophy of one William S. Lerach, who thought Shugart’s parade needed a little rain on it.

  In 1984 Seagate’s stock price suffered a precipitous decline—a phenomenon not uncommon in the fledgling disk drive sector. Lerach never viewed such drops as vagaries of the volatile high-tech market, and his inevitable lawsuit accused Shugart and his managers of “reckless” misrepresentation and a “scheme” to conceal company problems while pocketing huge payoffs—$15 million, in Shugart’s case, from insider sales. Shugart, taking Lerach’s boilerplate legal language personally, launched a counterattack in the press, likening Lerach “and his kind” to vultures, an epithet that was to be chorused in various iterations by hundreds of CEOs, who loudly complained that Lerach was actually interfering in the work their shareholders expected of them.

  Lerach pressed on, presenting Shugart with the specter of a trial, even estimating for him how many hours they would log putting up a defense and how much he and his company would likely shell out for legal expenses. The numbers were staggering. Shugart was apoplectic, telling friends that he felt Lerach was mocking him and the entire tech industry. “Al Shugart hated lawyers so much he kept a lawyer doll (named Bill) on his desk so he could periodically snap its head off,” one plaintiffs’ attorney recalled. Spitting mad, Shugart settled for $9 million. Lerach collected $3.1 million in fees and another $1.26 million in expenses. In the process, he made a lifelong enemy. Shugart vowed that he would dedicate a considerable amount of his “mind share” to trying to put Lerach out of business.

  “Enough is Enough,” blared the full-page 1990 magazine ad paid for by Shugart and aimed at Lerach. “Are securities lawyers holding your company ransom?” In the ad Shugart urged other executives to send him their business cards, if they wanted to join his campaign against plaintiffs’ lawyers. It only encouraged Lerach, who believed Shugart was helping him get business by making his name even better known. Not long after the advertising blasts, Shugart received an envel
ope from Lerach. Inside was the lawyer’s business card with a note that said: “Dear Al: There’s more coming.”

  Lerach was about to make good on his promise. One of the cases ready to file, Froman v. Seagate, accused Shugart of just the opposite of what Lerach normally alleged. In this lawsuit Lerach represented a plaintiff who complained that he’d sold stock when Seagate reported a loss, but that Shugart had failed to notify shareholders when the company experienced a subsequent upturn and instead purchased company stock himself, while concealing critical positive information. The suit was brought, that is, because the company’s stock had gone up. Shugart was infuriated, but there was nothing intrinsically nefarious about seeking relief for shareholders with this cause of action. This was precisely the kind of activity, brought to the attention of the Boston office of the Securities and Exchange Commission in the early 1940s, that had led to the expansion of Rule 10b-5 in the first place. Nonetheless, Lerach would later chortle to friends that he wished he could have seen Shugart’s face when, even after showing a profit, he still received a legal complaint accusing him of insider selling and then insider buying—all within a three-week period. The suit, noting that three weeks was a short time for a $2 billion company to reverse its fortune, was filed on September 22, 1989, in federal district court. “I have his picture on my wall right in front of me—I hate him,” Shugart told a business journalist. “He and the people like him are a drag on society.”

  Shugart would be sued by Lerach three times.

  ANOTHER TROPHY BEARING THE name of Ronald O. Perelman, one of America’s richest profiteers, would soon be added. For more than two decades the cigar-chomping Perelman reaped his fortune buying and selling beleaguered corporations. One of these entities—SCI Television—he purchased for $120 million and the assumption of $750 million in debt. He would consolidate this holding with several others in a package that paved the way for Fox Television. Finally he would sell his holdings to Rupert Murdoch for $3 billion. Along the way the purchase and consolidation of SCI had shareholders howling that not enough consideration had been given to their ownership interests.

  Lerach had plaintiffs lined up, ready to take on the famously combative, highly litigious, and heavily lawyered Perelman. Working on the case in Los Angeles was Jeff Westerman, a 1980 graduate of Lerach’s alma mater, the University of Pittsburgh Law School. Westerman, a diligent attorney, had uncovered promising facts, but he possessed a deferential nature. Lerach decided he needed someone with a blood instinct. He went outside the firm, hiring a friend, Patrick Frega, a high-profile personal injury lawyer from the San Diego area. Frega grew up poor in a tough New Jersey town; his father was run over one night walking home from a bar. Frega played football in college as a diversion from his anger. It didn’t work. “I probably would have become a mob hit man,” he would later say. Instead he joined the U.S. Marine Corps, training as a sharpshooter. He was deployed to Vietnam and then to “classified” areas, presumably in Laos and Cambodia, where his job was to target and eliminate “key” opponents.

  “In no other profession could I have done this legally and gotten paid for it,” Frega observed. His career as a military hit man ended when he suffered a near-fatal leg wound. After recovering, through the grace of the GI Bill, he attended a small law school in Florida. Later Frega moved to San Diego and set up private practice. Lerach had seen him perform and considered him not just a fearless but a “terrifying” litigator. Lerach vowed to one day turn him loose in one of his own cases. The Perelman case seemed made to order. Frega wasn’t a securities lawyer, but he learned fast, working all night, night after night, firing off memos to Lerach about how to pursue the case. “There’s no stopping him,” Lerach told friends.

  “He took Ron Perelman’s deposition. If I was civil and above board,” Lerach later said, in reference to the critics who complained of his own meanness, “then Frega was an assassin. He ripped Perelman’s throat out. He got up in his face and got him so fertummelt, so flummoxed … ‘So, you were lying?’ Perelman yells back, ‘Yeah, I was!’ He was pissed and confused.

  “Westerman, my timid little antelope, was in the deposition and couldn’t believe it,” Lerach continued. “He came to me with a memo saying Frega’s behavior was over the line. Somehow Patrick saw a copy. He got Westerman aside and said to him: ‘You little fuck, if you ever complain to Lerach about me again, you’re going home to mama in a body bag with a toe tag on.’ Westerman never spoke another word the rest of the case.”

  The lawsuit was settled for nearly $30 million. Frega received a check for more than $1 million. That was before his life took an indelible turn. “He was aggressive and insecure, and somehow felt he had to ingratiate himself with judges,” Lerach recalled, lowering his voice. “And he did things he should not have done.”

  A twenty-one-count indictment listing Frega as a defendant claimed that from 1983 to 1992 he and San Diego Superior Court Judges James A. Malkus and G. Dennis Adams engaged in more than 163 overt acts of racketeering conspiracy and mail fraud. Presiding Judge Bruce Greer was also implicated in the scheme, in which Frega stood accused of giving more than $100,000 in gifts to the three judges in return for favorable rulings netting him hefty fees. Greer resigned from the bench and became a prosecution witness. Frega, Malkus, and Adams went to federal prison. Before he began serving a forty-two-month sentence, Frega (whose wife sued for divorce) was also forced to declare bankruptcy. With his friend and legal colleague in prison, Lerach paid for Frega’s four children to continue their schooling, also contributing monthly allowances to each.

  That Lerach was willing to help at all held some irony, because Frega nearly dragged him down with himself and the others. Lerach was suing on behalf of shareholders who claimed that executives of Henley Corp., in the aftermath of a merger with Allied Signal, instituted a program called the Henley Executive Stock Purchase Plan, whereby they were able to give themselves nonrecourse loans from the company to purchase stock. Shareholders wanted an injunction, putting an end to the plan and redistributing money to themselves. Lerach drew a difficult judge and was combative in return. The judge transferred the case to Judge Greer, who, Lerach would eventually learn, had been scheming with Frega. Within weeks the plaintiffs prevailed, winning an award of more than $35 million. Lerach’s fee was estimated to be $10 million.

  After some delays a hearing was finally set before the judge to finalize the number. The night before, Lerach received a call from Frega. “Don’t worry, I talked to Judge Greer, you’re going to get your fee,” Lerach heard his friend say.

  Lerach nearly panicked. “You what?”

  Frega sounded taken aback; he thought he had done his friend a favor. “Don’t worry about it,” he told Lerach. Lerach did receive the fee, and later, after Judge Greer flipped, the plaintiffs’ lawyer, now a public figure for pulling corporate America’s chain, received attention from law enforcement. Judge Greer told criminal investigators that Frega had talked to him about Lerach’s fee. The implications were obvious to the authorities, as they were to Lerach. What they could not prove, and what Lerach swore did not happen, was a quid pro quo for Frega. “Thank God I hadn’t given Pat one penny,” Lerach said long after the fact.

  In retrospect, it is fascinating to contemplate what might have happened if Lerach had been caught up in the web woven by Frega and the judges. At the least Lerach would have lost his license to practice law. Corporate America would certainly have dodged many multimillion-dollar bullets fired repeatedly over the next twenty years. The U.S. Department of Justice would have had one less high-profile attorney to pursue in a bi-coastal investigation that took seven years and cost many millions of dollars.

  9

  MAKING A CASE

  Prominent in Bill Lerach’s trophy collection was a settlement with Nucorp Energy, a San Diego–based oilfield equipment supplier and energy explorer that had sold to unsuspecting investors some $150 million worth of securities late in 1981, less than a year before declaring bankruptcy
. As a metaphor, the trophy resembled a glass half empty because Lerach had sought $250 million in his lawsuit on behalf of shareholders and settled for $41 million. For the firm Milberg Weiss and for Bill Lerach, it would also come to resemble a glass whose bottom had dropped out.

  Requiring five years of discovery prior to a seven-month jury trial that would produce more than 13,000 pages of trial transcripts along with some fifty witnesses and thousands of articles of evidence, Nucorp would stretch the firm’s resources, costing more than $5 million and tying up its star litigator.

  Lerach and his team secured hundreds of documents—memos and notes—from the defendants and interviewed dozens of witnesses, including Nucorp officers and managers. The ex-Nucorp executives conceded their part in the questionable revenues, creative accounting methods, and dubious claims of oil reserves that had continued to lure investors. After learning that Lerach had said: “I’ll be living in his house”—literally the cliffside mansion that Lerach had been coveting in La Jolla—Nucorp president Richard Burns instructed his attorneys to settle.